Understanding Islamic Finance - Doha Academy of Tertiary Studies

444 Understanding Islamic FinanceSuitability of Shirkah-based Modes for FinancingAs regards the application of the preferable modes based on Shirkah principles, banks’management or the regulators may like to issue instructions to the practitioners in the banksto apply them keeping in mind the risk profile of the fund owners and ground realities ofthe business in respective areas. In many areas of business, use of Shirkah-based modesmight not even be possible. A person doing family business may be in need of bridgefinance and not of permanent or long-term funding. His requirement can be met throughtrade-based modes or leasing. In some other cases, their use may not be advisable due toa low-risk profile of the investors. Banks keep depositors’ money as a trust and they arebound to invest such money according to the wishes or instructions of the depositors, withoutcompromising on the Sharī´ah principles. If the depositors are risk-averse, their money willhave to be invested in leasing or trade-based modes. For example, a pensioner or a widowmay require an Islamic banker to invest his/her money in less risky but Sharī´ah-compliantbusiness because he or she is not in a position to bear the risk of loss that could arise inShirkah-based business. The bank, as a trustee, would be bound to invest the funds of suchrisk-averse investors in trade and Ijarah-based activities. Similarly, on the assets side, thebank’s clients may either not be willing to make the bank a partner in their business or maynot be keeping proper and correct records of the joint business; this may cause loss to thebank and, in turn, to the savers/investors.However, it should be accepted that Musharakah and Mudarabah or other PLS productsare the best alternatives to interest. They not only make the capital risk-bearing, a badlyneeded factor in growth and development even in developed countries, but also encourageentrepreneurship. But this should not lead to negation of non-PLS modes, which can alsoplay a role in capital formation and development of economies. Accordingly, there has beena gradual change in the approach of Islamic banking experts, and it is being increasinglyfelt that all Islamic modes of financing, if properly used in line with their Sharī´ah-relatedrequirements, can have a positive role in the development process. Islamic banks, whilefunctioning on a basis other than interest, have to perform a crucial task of resource mobilization,their efficient allocation on the basis of both PLS and non-PLS categories of modesand strengthening the payments systems to contribute to economic growth and development.17.3.8 Islamic Financial Institutions – Banks or Trade Houses?Islamic banking is also criticized on the basis that banking means intermediation betweensavers and borrowers; banks do not deal in real sector business. They facilitate trade andbusiness, but in that case also they deal in documents only. Islamic banks should not getinvolved in trading or other direct business, otherwise they would be exposing themselves tounnecessary risk and possible loss to the investors and the financial system. But this objectionhas no solid base. Even conventional financial business is conducted on the basis of differentstructures, namely commercial banks, universal banks, investment banks and other nonbankingfinance institutions or companies. In countries like Japan, Germany, Switzerlandand the Netherlands, banks are involved in real sector merchant and universal banking.Investment banks, mutual funds and other asset management companies are involved inalmost all countries in non-commercial business activities.Therefore, Islamic banks, which are not supposed to work on a purely financial intermediationmodel, are not something absolutely new and unique in global finance. As lendingand borrowing is not a major activity of IFIs, the universal banking model and investment